Insurance stocks fall up to 5% as IRDAI proposes a higher surrender value; here’s what it means
In a consultation paper, the Insurance Regulatory and Development Authority of India (IRDAI) has proposed a higher surrender value and lower charges for life insurance companies. As a result, insurance stocks have declined by up to 5 percent, counteracting the overall positive market trend.
Decline in Insurance Stocks
Max Financial Services saw the most significant decrease, dropping by 4.8 percent to ₹969. HDFC Life Insurance Company followed with a loss of 3.2 percent, reaching an intra-day low of ₹685. Life Insurance Corporation (LIC) and ICICI Prudential Life Insurance also experienced declines of 2.5 percent (₹795) and 2.3 percent (₹520.10) respectively. ICICI Lombard General Insurance, The New India Assurance Company, and SBI Life Insurance witnessed smaller declines of 1-1.5 percent.
Reason for Variation in Performance
The variation in performance among life insurance stocks can be attributed to a recent draft released by the IRDAI. The draft recommends a significant increase in the surrender value for non-participating insurance products, along with changes in how surrender charges are calculated.
Understanding Surrender in Insurance
In the context of insurance, surrender refers to the voluntary termination of a life insurance policy by the policyholder before its maturity or the occurrence of the insured event. Surrendering a policy relieves the policyholder from paying premiums and terminates the insurance coverage. The life insurance company is obligated to provide a specific surrender value to the policyholder based on the premiums paid during the specified period.
Regulatory Investigation
The IRDAI has conducted an extensive investigation into cases where policyholders were receiving minimal surrender values despite paying premiums for several years. Instances were found where life insurance companies structured products in a way that absorbed a significant portion of the premiums as surrender charges, particularly in scenarios designed to encourage surrenders. The investigation aimed to address concerns regarding transparency and fairness to policyholders.
Proposed Changes
The consultation paper by the IRDAI proposes a substantial increase in surrender value for surrendered policies and a reduction in surrender charges imposed by life insurers. While this benefits policyholders by allowing them to recoup a larger portion of their paid premiums in case of termination before maturity, it poses challenges for life insurers. Higher surrender values will impact the profit margins of life insurance companies, especially in the non-participating portfolio where most surrenders occur. The objective is to strike a balance between policyholder benefits and the financial implications for insurers.
Calculation of Surrender Value
To illustrate the proposed changes, let’s consider a non-participating policy with an annual premium of ₹1 lakh surrendered in its sixth year after five premium payments totaling ₹5 lakh. If the life insurer adopts a threshold amount of ₹25,000, the surrender value calculation would be based on 35 percent of the threshold value (₹1,25,000), resulting in ₹43,750. The refund beyond the threshold value is calculated as the surrender value on the total premium paid minus the threshold value, which amounts to ₹3.75 lakh (₹5 lakh – ₹1,25,000). Therefore, the total surrender value paid by the life insurer to the policyholder would be ₹4.18 lakh.
Impact of the Proposed Changes
Under the current regime, the life insurance company pays ₹1,25,000 on a ₹5 lakh premium. However, under the proposed regime, the surrender value increases significantly to ₹4.18 lakh. Additionally, the surrender charges for the life insurance company reduce from approximately ₹3.75 lakh to around ₹80,000 (₹5 lakh − ₹4.18 lakh).
These proposed changes represent a significant shift in favor of policyholders, providing them with a higher surrender value and reducing the financial impact of surrender charges borne by the life insurance company.
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